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Reduced net interest revenue and lower mortgage banking revenue were the negatives for the quarter. Moreover, elevated operating expenses were a dampener. Yet, reduced net charge-offs and strong capital ratios were the tailwinds.

Net income attributable to the shareholders of BOK Financial in the reported quarter was $82.6 million, compared with $87.4 million in the prior quarter.

For full year 2012, net income was $351.2 million or $5.13 per share, compared with $285.9 million or $4.71 per share in the prior year. Yet, full year earnings missed the Zacks Consensus Estimate by 7 cents per share.

With cash flows being reinvested at lower rates, the yield on its securities portfolio continued to fall. Yield on average earning assets also dipped 17 basis points sequentially.

BOK Financial’s fees and commissions revenue amounted to $165.8 million, down slightly on a sequential basis. Elevated revenues from the acquisition during the third quarter were offset by reduced mortgage banking revenues. Moreover, record mortgage loan production volume during the reported quarter was mitigated by a seasonal decline in mortgage loan commitments and loans held for sale.

Total operating expenses at BOK Financial were $222.1 million, nearly flat sequentially. Excluding changes in the fair value of mortgage servicing rights, operating expenses totaled $226.8 million, up 6.6% sequentially. The company experienced an elevation in both personnel costs as well as non-personnel expenses in the reported quarter from the prior quarter.

Credit Quality

The credit quality of BOK Financial’s loan portfolio produced mixed results. Nonperforming assets totaled $277 million or 2.23% of outstanding loans and repossessed assets as of Dec 31, 2012, up from $264 million or 2.21% of outstanding loans and repossessed assets as of Sep 30, 2012. Results include the impact of regulatory guidance that primarily affected residential mortgage loans.

Yet, net charge-offs amounted to $4.3 million (or 0.14% of average loans on an annualized basis) in the reported quarter, down from net charge-offs of $5.7 million (or 0.19%) in the prior quarter.

Further, the combined allowance for credit losses amounted to $217 million or 1.77% of outstanding loans as of Dec 31, 2012, declining from $236 million or 1.99% of outstanding loans as of Sep 30, 2012.

As a result, BOK Financial recorded negative provision for credit losses of $14 million in the reported quarter as against no provision for credit losses in the prior quarter.

Capital Position

As of Dec 31, 2012, armed with strong capital ratios, BOK Financial and its subsidiary banks exceeded the regulatory definition of well capitalized. However, as of the same date, Tier 1 and total capital ratios were 12.78% and 15.13%, respectively, down from 13.21% and 15.71%, respectively as of Sep 30, 2012.

Moreover, tangible common equity ratio slightly deteriorated to 9.25% as of Dec 31, 2012 from 9.67% as of Sep 30, 2012. Notably, the decline in Tier 1, total and tangible common equity ratios was mainly a result of special dividend payment in the fourth quarter.

Outstanding loans at BOK Financial as of Dec 31, 2012 were $12.3 billion, up $479 million from the prior quarter. Augmentation in commercial loans, commercial real estate, consumer loans and residential mortgage loans drove the increase.

Period end deposits amounted to $21.2 billion as of Dec 31, 2012, up from $19.1 billion as of Sep 30, 2012. Elevation in interest-bearing transaction accounts and demand deposit accounts were partly offset by a fall in time deposits.

Dividend Update

During the reported quarter, the company paid cash dividend of $26 million or 38 cents per share and a special cash dividend of $68 million or $1.00 per share. On Jan 29, 2013, BOK Financial’s board of directors approved a quarterly cash dividend of 38 cents per share. The dividend will be paid on or about Mar 1, 2013 to shareholders of record as of Feb 15, 2013.

Our Viewpoint

The strategic expansions and local-leadership based business model of BOK Financial, with peers such as Texas Capital Bancshares Inc. (TCBI - Analyst Report), Metrocorp Bancshares Inc. and First Financial Bankshares Inc. (FFIN - Snapshot Report), have helped it transform into a leading financial service provider from a small bank in Okla. Going forward, we believe BOK Financial’s diverse revenue mix and favorable geographic footprint would support its growth.

Moreover, in Aug 2012, BOK Financial announced the acquisition of Denver-based The Milestone Group Inc., a wealth management firm. The acquisition by BOK Financial demonstrates its aim of diversifying its revenue opportunities by augmenting its fee-based business.

Having strengthened its foothold over the years through its local bank brand, Colorado State Bank and Trust, BOK Financial has a robust presence in Denver. Therefore, with the acquisition of Milestone Group, the company will further consolidate its foothold in Denver with the help of the acquired firm’s wealth management brand and proficiency.

Though regulatory issues and risks emanating from its private label mortgage backed securities portfolio remain a concern, we believe that its sturdy financial position and expense control initiatives and efficiency will help it navigate through the current cycle.

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